Manage Your Risk When Choosing Healthcare Payment Models

One size does not fit all

Published: Wednesday, November 2, 2016 - 16:30

When Congress passed the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), “risk” moved front and center as a feature of provider reimbursement models. These days, terms such as “at risk” and “risk-based” are used more and more, but what do they really mean? And why should healthcare providers now be more concerned with risk than they have been in years past?

Merriam-Webster defines risk as “the possibility that something bad or unpleasant (such as an injury or a loss) will happen.” In the current healthcare environment, risk could be defined as a loss of revenue: Providers and payers are risking income when they provide services to patients. The question has become, when treatments involve expensive services, drugs, or procedures, who will pick up the check?

Risk isn’t new to payment models. Although traditional fee-for-service models are not generally considered at-risk payment models, they certainly involve risk. The risk, however, is born by the payer, not the provider. In fee-for-service, the payer issues a reimbursement when the provider renders the service. The payment isn’t neither dependent upon the quality nor success of the service provided nor dependent upon the payment falling below the total of the patient’s insurance premiums.

In the fee-for-service model, higher service volume generates greater profits for the provider but lowers profits for the payer. The risk, therefore, is born by the payer.

Alternatively, in a full-capitation payment model, the provider bears the burden of risk because the payment received per patient is fixed, and the provider is responsible for delivering effective services in a cost-effective manner. In this environment, the ideal situation is for payment to be less than the cost of the treatment, allowing the provider to profit. By reducing costs, the provider can generate higher profits with a lower volume of services than in a fee-for-service model.

Capitation is only one approach to changing reimbursements, but as new payment models are emerging, risk is clearly shifting away from payers to patients and providers. These new “at-risk” payment models involve bundled payments, shared savings, pay-for-performance, and capitation, just to name a few. Some models are hybrids, including several different approaches. Others focus on maximizing savings for specific treatments. Still others exploit the benefits of coordinated care.

Some of the current alternative payment models supported by the Centers for Medicare & Medicaid Services include:
• Comprehensive Care for Joint Replacement model
• Bundled Payment for Care Improvement Initiative, consisting of four models
• Comprehensive Primary Care Plus
• Medicare Shared Savings—Tracks 1, 2, and 3
• Next Generation Accountable Care Organization model

Why are so many payment models available? Because a single payment model does not fit all providers.

For example, a rural primary-care provider with a small, high-acuity patient population may be less likely than others to benefit from a fully capitated payment model, but may profit from using a fee-for-service model. It’s likely that orthopedic providers in a community with one high-cost, post-acute care provider will not thrive under a bundled payment model without incentives for the post-acute care provider to manage its costs. The same orthopedic provider may, however, benefit from a shared-savings payment model.

So how do you choose the payment model that’s right for you? First, know your data. Spend some time assessing the following:
• Whom do we serve?
• What services do we provide?
• Do we provide high-quality services?
• What relationships do we have with other providers that can help or hurt?
• Is the business profitable?

At-risk payment models can be complex but likely are here to stay. Thriving in this environment means crafting a payment reimbursement model that works for you. You’ll want to maximize your use of internal resources, but healthcare consultants and industry advisers are also available to assist in evaluating the best payment model for you and your practice.

About The Author

Brooke Pierce

Brooke Pierce is a senior manager in healthcare services at HORNE LLP. Pierce performs valuations of healthcare entities, including medical practices, hospitals, ambulatory surgery centers, diagnostic centers, and joint ventures. She also specializes in valuation of medical equipment and office furniture as well as intangible assets. Additionally, she performs valuations of contractual arrangements involving healthcare entities and providers such as block lease, management services, and professional services arrangements.